"He said 'no, I swear I didn't [kill him]','' Mrs Macdonald told the court today.
Ewen Macdonald, 32, is accused of gunning down his brother-in-law Scott Guy, 31, in the early morning darkness of July 8, 2010 after growing tensions over the family farm they co-managed.
He has denied murdering Mr Guy, but has admitted burning an old house on the Guys' property in late 2008 and vandalising the new house being built there in 2009. The vandalism included breaking most of the house's windows, kicking in the walls and leaving graffiti messages on the exterior walls, including "f*** hore''.
But until his arrest for murder, his family had no idea he was involved in the other incidents almost two years before Mr Guy was killed.
His wife Anna, Mr Guy's sister, said that following Macdonald's arrest she had many questions for him while he remained in custody.
"I had a lot of questions. It was visit after visit after visit for me to understand what went wrong.''
Aside from asking Macdonald whether he killed Mr Guy, she also asked him why he had vandalised the property.
He had responded that he was really annoyed.
"It was more directed at Kylee than Scott. He thought Kylee wound up Scott a bit with his ideas.''
But Macdonald said he felt terrible "and started to make up for what he'd done'' - a change in character that Mrs Macdonald noticed.
He became more involved with his children at school, including joining the schools board of trustees, and bought Kylee a tree for her birthday - something Mrs Macdonald would normally do.
"I remember thinking `this is great','' Mrs Macdonald told the court.
Mrs Macdonald earlier gave evidence that her husband said he burnt down the empty house for fun, but today said his reason for the vandalism was quite different.
She did not notice a change in character when the arson happened, but did notice a change after the vandalism.
Both Mrs Macdonald and Scott Guy's father, Bryan Guy, told the jury of Mr and Mrs Scott's shock over the vandalism and how Mrs Guy decided she did not want to move into the house, but instead wanted to move back to her home town of Hawkes Bay.
Mr Guy and other family members eventually reassured Mrs Guy she should move into the new family home.
Mrs Guy today also told the court that she could not understand the vandalism.
"It was just terrible.''
She said that the whole time she was walking through the property inspecting the obvious damage she wondered who could have done something like that.
But she knew she and Scott had not done anything wrong and it could not be aimed at them.
Mrs Guy has taken to the stand four times now, and refuses to call Macdonald by his name, instead only referring to him as "the accused''.
The Crown alleges Macdonald carried out the arson attack and vandalism as part of a campaign of intimidation aimed at frightening Mr and Mrs Guy away from the family farming business.
The court also heard today how letters were seen in the Guys' mailbox around the same time as the arson and vandalism attacks - again something the crown alleges was part of a scare campaign by Macdonald.
Macdonald denies ever writing the notes.
The three hand written notes, seen by rural posties Brett MacDonald and Emma Beaney on separate occasions, said "you cheating whore, what comes around, goes around'', "stay away from him Kylee, you whore'', and "now you know how it feels to lose something you love''.
Mrs Guy gave evidence that she has never seen the letters.
The trial before Justice Simon France and a jury of 11 continues tomorrow with evidence on dive boots the crown says Macdonald was wearing when he allegedly killed Mr Guy.
Macdonald's parents are both expected to take to the stand for the first time tomorrow.
